Corporate Advisory

25 Mar 2009

New Zealand's Overseas Investment Regime Under Review: What's wrong with it and what are the alternatives?

Finance Minister Bill English recently announced a review of the Overseas Investment Act 2005 (Act) and the Overseas Investment Regulations 2005 (Regulations). He described the regime as "cumbersome", "complex" and "legalistic", explaining that New Zealand needed simpler rules and quicker decisions to attract foreign investment and help the New Zealand economy through the recession. 

In this FYI, we examine some of the major current problems and suggest some alternatives for the review exercise. 

The Current Regime

To understand the scope and potential impact of the review, you need to bear in mind the key features of the current regime.

Consent is required before an "overseas person" invests in "sensitive land", or "significant business assets", or fishing quota.

An "overseas person" is someone who is not a New Zealand citizen or resident, and all overseas companies. An overseas person is also a New Zealand company or entity with 25% or more foreign ownership or control.

An acquisition of an interest in "sensitive land" (including businesses that own or lease sensitive land) requires consent. "Sensitive land" includes non-urban land areas greater than five hectares, or other land classified as sensitive because it contains or adjoins waterways, parks, conservation areas, islands, or areas of historic significance.

Leaving aside fishing quota, Overseas Investment Office (OIO) consent is also required to invest in "significant business assets" where the overseas person is acquiring more than 25% ownership or control and the price paid exceeds $100 million, or the entity is worth more than $100 million.

A number of factors must be taken into account when applications for OIO consent are considered. The overseas person must have business experience and acumen relevant to the investment, be financially committed to the investment and be of good character.

Additionally, where "sensitive land" is involved, the overseas person must demonstrate that the investment will result in a net benefit to New Zealand. This involves consideration of:

• whether the investment will result in new jobs, introduction of new technology or business skills, increased exports, added market competition, improved efficiency or production, additional investment for development, or increased primary processing;
• whether there are adequate mechanisms to protect and enhance significant flora and fauna, wildlife, historic heritage, walking access and areas of foreshore and seabed on the land in question; and
• any other factors set out in the Regulations.

Where the "sensitive land" includes foreshore, seabed, riverbed or lakebed ("special land"), the vendor must first offer back that "special land" to the Crown before consent will be granted.

So, what's wrong with the current regime? What alternatives are there?

Process

Information required is too complex: Advising clients, collating information and preparing applications is time consuming and expensive. Some applications can fill multiple folders and take teams of people many weeks to prepare. Recommendation: Reduce information requirements to only key information necessary to make the consent decision and consider introducing a standard application form.

OIO consent takes too long: It depends on the investment, but it typically takes several weeks to prepare an application and about three months for the OIO to process it (extreme cases have taken more than six months). This is too long. Most investors want certainty quickly. Some investors must meet statutory or contractual timeframes (often driven from offshore). And overseas investors struggle to compete with New Zealand buyers who can make unconditional offers with short settlement dates. Recommendation: Reduce information requirements and increase consent thresholds (see below). This will reduce the OIO workflow pressure. Increasing OIO resources would also help, but may not be necessary if other changes are effective.

Significant burden on vendors: A prudent vendor seeking the best price will provide bidders with information for an OIO application, possibly prepare a template OIO application for bidders, answer questions from the OIO and, where relevant, offer back "special land" to the Crown (see below). This is time consuming and expensive. Recommendation: Reduce information requirements and increase consent thresholds. Remove or simplify the offer back of "special land" provisions from the Act (see below). 

Too many low level applications require Ministerial approval: In some cases the OIO has discretion to grant consent, but in many cases Ministerial consent is required. This consent takes about two weeks longer, as the Ministers must consider the OIO's report and make a decision. Recommendation: Create a separate set of higher thresholds (whether by value or definition of strategic or significant assets) where Ministerial consent is required and delegate more applications to the OIO.

Thresholds

$100 million threshold - too low?: In 2005, when the Act replaced the previous Overseas Investment Act 1972, drafts of the Bill contemplated thresholds far higher than $100 million. Recently Canada increased its threshold and a general net benefit review only applies if the enterprise value of the business is at or above $CA600 million (previous threshold was "book value" of $CA312 million). Recommendation: Consider a higher dollar threshold in combination with appropriate "sensitive land" and/or "strategic asset" thresholds.

25% control threshold - too low?: OIO consent is required to invest in "significant business assets" or "sensitive land" where the overseas person is acquiring more than 25% ownership or control in an entity which has "sensitive land" or "significant business assets". 25% is not true control in a vast number of situations, so an overseas investor cannot effect positive change in the business. The Canadian Pension Plan Investment Board discovered this when the Ministers refused to grant consent to its acquisition of 40% of Auckland International Airport, stating: "it is unknown whether the Applicant would be able to influence the AIAL board given its restricted voting rights". This puts investors acquiring interests between 25% - 50% in an awkward position. They must apply for OIO consent, but they do not necessarily have the ability to control business outcomes and therefore cannot meet the net benefit test. Recommendation: Consider increasing the control threshold. 

"New Zealand companies" are treated as overseas persons: Some companies listed on the NZX are technically "overseas persons" under the Act, notwithstanding that the majority of the board may be New Zealanders and the majority of acquisition decisions are made by the board or New Zealand management. These companies are materially disadvantaged - eg. they cannot make unconditional offers for "sensitive land". Recommendation: Reconsider the 25% control threshold (see above). Also, consideration should be given to wider exemptions for businesses with a significant degree of board and management control in New Zealand.

Increasing your investment requires consent even if you own most of the business: If you own or control more than 25% of a company and increase your interest you must obtain OIO consent. In one case, a majority shareholder who owned 85% of a company had to apply for consent to acquire the balance of 15%. They needed a business plan explaining how acquiring the balance would result in a net benefit to New Zealand - not a simple, quick, or inexpensive task. Recommendation: Consider whether consent should be required to acquire an increased interest in a business beyond a certain limit (eg. beyond 50%). 

Should offshore deals be covered by the Act?: The Act is so broad that it often captures offshore deals between two overseas parties, because the vendor's business includes some New Zealand assets. We have acted for offshore listed entities making takeover offers for other offshore listed entities, where a small percentage of total worldwide assets were in New Zealand. In each case, obtaining OIO consent was one of the, if not the, longest process involved and caused considerable stress given the tight takeover timetables elsewhere. Recommendation: Consider reducing the overseas application of the Act. Some is necessary to ensure the Act is not avoided by artificial offshore structures, but there is room for a middle ground. One compromise might be to exempt offshore transactions involving parties which are listed on recognised offshore exchanges. Detailed criteria for such an exemption would need to be considered, but might include only exempting foreign to foreign deals where the New Zealand assets are less than or equal to, say, 20% of the worldwide assets of the target.

"Sensitive land" thresholds too low?: In many cases small and/or insignificant areas of land are deemed "sensitive land". For example, where a business owns or leases land which adjoins a small reserve, or perhaps a creek, the land being bought or leased constitutes "sensitive land" and consent is required. Recommendation: Consider carefully exactly what type of land the Government wants to protect, to the very clear exclusion of all other types of land. This issue will require detailed and specific submissions by experts.

New Zealand "associates" of overseas persons need OIO consent: The definition of "associate" is so wide that it includes parties who are not truly associated with an overseas person and requires those "associates" to obtain OIO consent. Here is a scenario typical of what we have seen. Three New Zealand investors, along with one overseas investor (with a less than 25% interest in the target company) want to buy shares in a New Zealand company. The four investors are not associated in any usual sense of the word, but the Act deems that they are, because they are "acting in concert" in relation to the investment. In this case, the New Zealanders must apply for OIO consent. Recommendation: Narrow the definition of associate to capture only true associates, having regard to the intent of the definition, which is to prevent overseas persons from avoiding the Act by structuring investments through multiple associated entities. 

Net Benefit Test

Net benefit test too tough?: The net benefit test applies to investments in "sensitive land". Applicants must provide a lot of detailed information, including a five year business plan for the land/business. Applicants must demonstrate that their investment in land will, or is likely to, benefit New Zealand (or any part of it). This test creates a ratchet, in that every overseas owner of an asset must do better than the previous owner. This in turn creates a perverse incentive for owners (at least to some degree) to operate their business inefficiently to have the option to sell to an overseas person. For example, we are aware of a highly qualified and reputable overseas investor who did not obtain consent, because they could not demonstrate that their investment would result in a net benefit to New Zealand. The current owner was doing too good a job. Recommendation: The net benefit test may be appropriate for certain key or strategic assets, but consider alternative tests for other assets. One alternative, used in Australia, is that the investment must not be contrary to the national interest of Australia; but status quo is alright.

Complexity of significant flora / fauna / wildlife / historic heritage / walking access: Part of the net benefit consideration is how the overseas investor will manage areas of significant vegetation, wildlife, historic heritage and walking access. This is easily dealt with for an industrial site in Auckland, but it becomes much harder when the investment involves extensive landholdings across the country or substantial rural land. In complex cases, expensive specialist consultants visit each site and categorise all plants and animals on each site, then come up with a management plan for each site. Recommendation: Consider precisely what the Government wants to protect and then apply more generic standards of management. Consider whether the Act is the best place to deal with these issues or whether specific legislation should deal with each issue separately.

Strategic Assets

Strategically important infrastructure on "sensitive land": In previous FYIs, we argued that the new regulation 28(h) should be repealed - that regulation requires the Ministers to consider whether investments in strategically important infrastructure on "sensitive land" would assist New Zealand to maintain New Zealand control of such assets. Recommendation: Act on the recommendations of the Regulations Review Committee to review regulation 28(h) and consider an amendment to the Act for strategically important infrastructure as a class of sensitive asset, separate to "sensitive land".

Special Land

Offer back of "special land" is a debacle: Where an investment involves "special land", the vendor must offer that "special land" to the Crown. Some material problems have arisen with this process. First, it is often difficult to determine exactly who owns the beds of waterways. Second, the process of survey, valuation and negotiation contemplated in the Regulations is not used - in order to obtain OIO consent, vendors simply give the "special land" to the Crown. Third, often insignificant waterways constitute "special land", so a lot of effort and money is expended for little or no benefit. For example, if an industrial site adjoined a creek and the vendor owned the bed of the creek from the bank to the middle of the creek, the vendor would have to offer back half the bed of the creek to the Crown - who benefits from this? Recommendation: Focus on what the Government really wants - ownership/access to the beds of significant bodies of water. Alternatively, separate legislation could deal with Crown ownership / public access to waterways. 

Exemptions

Exemptions too narrow: There are two main exemptions: (1) automatic exemptions in specific circumstances; and (2) exemptions requiring application to the Ministers. An example of an automatic exemption is regulation 33(1)(a) which exempts investors where the "acquisition" occurs as part of a restructure within a group which is wholly owned by one entity. In a recent case, the wholly owned group was owned by two entities. The OIO concluded that regulation 33(1)(a) did not apply and we had to apply for an exemption, which was granted after some delay and expense. Recommendation: Broaden the exemptions to exempt any transaction that does not result in a change in ultimate beneficial ownership. Consider introducing a short form exemption process delegated to the OIO.

Conclusion

Many overseas investors are astounded by the broad net cast by the Act and Regulations and the detailed, costly and time consuming process of obtaining consent. At a time when New Zealand is looking to minimise the economic consequences of the global crisis, foreign direct investment is more important than ever. We support any move by the Government to simplify the overseas investment regime to attract investment, whilst ensuring that New Zealand's strategic and unique assets are protected.

Simpson Grierson will be making submissions as part of the Government review and we would encourage you to do the same. Please contact us if you want our help with your own submissions.

Authors

Kevin Jaffe

Partner - Corporate & Commercial

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Shelley Cave

Partner - Corporate & Commercial

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Peter Hinton

Partner - Corporate & Commercial

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Don Holborow

Partner - Corporate & Commercial

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Michael Pollard

Partner - Corporate & Commercial

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Peter Stubbs

Partner - Corporate & Commercial

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Greg Allen

Senior Associate - Property & Infrastructure

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Alex Campbell

Senior Associate - Corporate & Commercial

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Craig Nelson

Senior Associate - Corporate & Commercial

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